Arbitration Process Issues

PRECLUSIVE EFFECT OF PRIOR ARBITRATION IS AN ARBITRABLE ISSUE

April 24, 2014 by Carlton Fields

The U.S. District Court for the District of Massachusetts recently applied the First Circuit’s analysis in Employers Insurance Co. of Wausau v. OneBeacon American Insurance Co., Case No. 13-1913 (1st Cir. Feb. 26, 2014), when it held that the preclusive effect of a prior arbitration is itself an arbitrable issue. Faced with one previously concluded and one pending arbitration between insurers and their reinsurer regarding the interpretation of an “Access to Records” clause as it pertained to allegedly privileged documents, the district court was not asked to vacate, modify, or correct the previously concluded arbitration order. Instead, both parties consented to the court confirming that order and sought to argue about the proper forum for the interpretation, application, and performance of the arbitration order. Ultimately, the court emphasized the First Circuit’s “general rule” that the preclusive effect of a prior arbitration is an arbitrable issue, particularly where, as in this case, the plain terms of the parties’ arbitration clause broadly encompasses “any dispute arising out of” the agreement. Liberty Mutual Insurance Co. v. Allstate Insurance Co., Case No. 13-cv-10387 (USDC D. Mass. Mar. 31, 2014).

This post written by Kyle Whitehead.

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TRIO OF CASES BETWEEN INSURERS AND REINSURERS REDUCED TO TWO

April 22, 2014 by Carlton Fields

Within weeks of each other, three suits were filed involving overlapping parties and similar claims regarding arbitration of disputes arising from reinsurance agreements between Transatlantic and Continental and between Transatlantic and AIG. In one of the three suits, National Indemnity Company (“NICO”) sought a preliminary injunction in the District of Nebraska enjoining Transatlantic from compelling NICO to arbitration in the other two actions in Illinois and New York. Considering the issue of where NICO’s claims should be resolved, the Nebraska court determined that while it could enjoin Transatlantic from compelling NICO to arbitration, it did not have the authority under the Federal Arbitration Act to compel arbitration under agreements that chose Illinois and New York as the venue for arbitration. The court would not therefore be able to grant complete relief to the parties. Comprehensive resolution could only be achieved by severing NICO’s claims and transferring those relating to the Transatlantic-Continental agreement to the Northern District of Illinois and those relating to the Transatlantic-AIG agreements to the Southern District of New York. National Indemnity Co. v. Transatlantic Reinsurance Co., Case No. 8:14-CV-74 (USDC D. Neb. Mar. 31, 2014).

This post written by Abigail Kortz.

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SIXTH CIRCUIT REFUSES TO PERMIT JUDICIAL REVIEW PRIOR TO CONCLUSION OF REINSURANCE ARBITRATION PROCEEDING

April 21, 2014 by Carlton Fields

The Sixth Circuit recently reversed a district court’s decision to stay arbitration proceedings in a dispute concerning allegations of overbilling on a reinsurance program. The arbitration clause from the treaty established a tripartite method of arbitration – one arbitrator selected by each side and one neutral umpire. During the course of the arbitration (and before rendition of a final award), one of the parties contended that its selected arbitrator had been disenfranchised by the other two arbitrators and that inappropriate ex parte communications had occurred. A lawsuit was filed in Michigan state court, seeking to vacate an interim award on the grounds that the two arbitrators had exceeded their authority under the treaty and that the umpire had displayed evident partiality. The case was removed to federal court, where the district court recast the challenge as a breach of contract dispute regarding the rules under which the arbitration was to proceed, and it granted an injunction to stay the arbitration. On appeal, the Sixth Circuit reversed, concluding that the district court erred by prematurely interjecting itself into the private dispute, noting that parties to an arbitration generally may not challenge the fairness of the proceedings or the partiality of the arbitrators until the conclusion of the arbitration and the rendition of a final award. The Sixth Circuit made a point to disagree with the district court’s application of 9 U.S.C. § 2, noting that “[n]othing in the text or history of the FAA suggests that § 2 was intended to displace § 10’s limitation on judicial review of non-final awards.” Savers Property & Casualty Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh, PA, Nos. 13-2288/2289 (6th Cir. Apr. 9, 2014).

This post written by Catherine Acree.

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COURT COMPELS ARBITRATION OF COVERAGE ISSUE IN UNDERINSURED MOTOR VEHICLE POLICY

April 17, 2014 by Carlton Fields

A federal district court has compelled arbitration of a coverage issue arising out of an Underinsured Motor Vehicle Coverage (UIM) policy issued by Farm Bureau Property & Casualty Insurance Company. Farm Bureau had argued that the court must first decide the initial issue of coverage, whether the umbrella coverage section of the UIM policy extended to the insured’s excess damages, before anyone — the court or a panel of arbitrators — could determine whether Farm Bureau’s actions in denying the insured’s claim constituted breach of contract or bad faith. The court disagreed, noting the material difference between the UIM’s arbitration clause and other industry-standard arbitration clauses that refer a narrower question to arbitration. The broader clause, as stated in the UIM policy, refers to arbitration any disagreement between the insured and the insurer as to the right of the insured to recover damages, not just from the tortfeasor but under the provisions of the policy as well. The court found that the broader language includes the arbitration of coverage issues. Kenneth J. Moore, et al. v. Farm Bureau Property & Casualty Insurance Co., Case No. 2:13-CV-01815 (USDC D. Ariz. Jan. 21, 2014).

This post written by Renee Schimkat.

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ARBITRATION CLAUSE IN AGREEMENT BETWEEN INSURED AND REINSURER HELD INVALID UNDER NEBRASKA LAW

April 15, 2014 by Carlton Fields

A federal district court has held an arbitration clause in a Reinsurance Participation Agreement (RPA) between an insured and a reinsurer invalid and unenforceable under governing state law. The RPA complemented a standing Quota Share Reinsurance Agreement between reinsurer Applied Underwriters Captive Risk Assurance (AUCRA) and the insured’s insurers whereby AUCRA was ceded a portion of the insured’s premiums paid under a Workers Compensation Profit Sharing Plan. When the insured failed to pay its premiums, it received notice that its workers’ compensation policies and the RPA were being terminated for nonpayment. After attempts to resolve the dispute with AUCRA failed, the insured filed a lawsuit seeking declaratory and other relief, including reformation of the RPA. AUCRA moved to compel arbitration pursuant to the RPA’s arbitration clause.

The court analyzed the arbitration clause under Nebraska law, which the parties agreed controlled, and found the clause fell within the purview of a Nebraska statute prohibiting arbitration clauses in insurance contracts. The court rejected AUCRA’s arguments that (a) the statute did not apply to the RPA because the statute is aimed only at traditional insurance contracts between an insurance company and its insured, and (b) even if applicable, the RPA fell within the reinsurance exception contained within that statute. The court noted that the reinsurance exception applied to “contract[s] between insurance companies including a reinsurance contract” and the insured was not an insurance company. The court also rejected AUCRA’s argument that the insured had waived or was otherwise estopped from contesting the validity of the arbitration clause by virtue of its pre-suit settlement attempts. The court thereby denied AUCRA’s motion to compel arbitration and granted the insured’s motion to stop arbitration. On a final issue, the court denied AUCRA’s motion to transfer venue to Nebraska per the RPA’s forum selection clause, finding the interests of justice weighed in favor of retaining the case in Tennessee. Milan Express Co., Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., Case No. 1:13-CV-01069 (USDC W.D. Tenn. Jan. 23, 2014).

This post written by Renee Schimkat.

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